Stephanie Pomboy: "Buckle Up" For 2027 - The Market Is Going To Be "Brutal"

Stephanie Pomboy · MacroMavens

Market pricing of aggressive Fed tightening is laughable, given weak growth and no runaway inflation.

She calls the notion that the Fed will have to get aggressive and tighten because inflation is out of control and growth is strong laughable. She expects the bond market to price that out. She prefers the front end of the yield curve, but she plans to wait until the PPI data has been released and the reaction has settled before acting on it.

“I do think that this notion that the Fed's gonna have to get aggressive and tighten because inflation's out of control and growth is so strong is laughable”at 34:50

Stephanie Pomboy · MacroMavens

The Fed's balance sheet matters more than the funds rate, which has had little impact.

She has long argued that the focus should be on the Fed's balance sheet rather than the fed funds futures. Changing the policy rate has had little effect in the last several cycles. The balance sheet, which keeps creeping upward, is what should matter to investors.

“I've long said that the focus should really be on the Fed's balance sheet... Never mind that pulling that lever has had precious little impact the last several times.”at 36:37

Stephanie Pomboy · MacroMavens

The Fed will eventually resume QE 'in monster fashion' across the maturity curve, not just T-bills.

Pomboy argues the Fed's current 'non-QE' bill purchases (about $40B a month) will inevitably become outright QE covering all maturities. She notes Kevin Warsh has long opposed balance-sheet expansion, calling QE 'free money', yet is now running these purchases, so she sees the stance as untenable. She expects the Fed to return to QE in a much larger form once a bear market hits. QE is the valve through which the currency gets debased, so it is a currency story as much as a rates story.

“I have long thought that they will go back to QE in monster fashion.”at 39:53

Stephanie Pomboy · MacroMavens

A market break in Q1 2027 would force the Fed to rescue markets, as it did in 2018.

Pomboy agrees with Jim Carson's scenario of a swift early-Q1 2027 market plunge that forces the Fed to intervene. She draws the parallel to 2018, when Trump pressed the Fed to cut rates, the Fed kept hiking, and markets broke, which forced the Fed's hand. She sees the same pattern developing now, with Trump pressing for cuts while the Fed raises rates, so she expects a market break to bring the Fed back to rescue mode.

“Trump isn't berating Kevin Walsh, but he's basically been berating the Fed to cut rates, and they went ahead and raised him anyway. And then finally, the markets broke, and that's what forced the Fed's hand.”at 43:33

Stephanie Pomboy · MacroMavens

Fed likely delivers one 25bp hike in December, but the tightening cycle will not be material.

Pomboy says a December hike is likely if the data keeps running as it has, though the next data points could change that. She says she 'didn't think they should have tightened in the first place' and expects at most one more 25bp move, which she does not think will amount to a material tightening cycle. Her reasoning ties this to the inflation hysteria she sees in the market, which she thinks is misplaced.

“I just think, you know, maybe they do another 25 in December, but I I really... I hate to say it because I didn't think they should have tightened it in the first place, but this is not going to be a material tightening cycle in my view at all.”at 1:02:49

Stephanie Pomboy · MacroMavens

Market swings will get wild and 2027 will be brutal in ways not yet experienced.

She expects market gyrations to become much wilder from here and a brutal period, worse than anything experienced so far. The case rests on consumers already stretched and funding spending with credit, pricing power being squeezed, and a post-election policy shift that she sees as less supportive of growth and more detrimental to employment and real wages. She also points to credit-market strain as a possible transmission channel and to a possible unwinding of the AI trade.

“the market gyrations are going to get pretty wild. And it's gonna be brutal in a way that we haven't experienced.”at 0:08

Stephanie Pomboy · MacroMavens

A coming bear market will be brutal, in a way the US has never experienced, with no easy cleansing.

Pomboy rejects the view that a bear market would be a healthy cleansing of excesses. She points to much more leverage and much lower-quality debt than before 2008, plus state and local pension deficits, lost federal capital-gains receipts and a weakening economy, so the damage would spread across the whole economy. She expects market gyrations to get wild through 2027 and says the backdrop will make buying cheap stocks unpleasant. She calls this a very real possibility.

“It's gonna be brutal in a way that we haven't experienced.”at 53:38

Stephanie Pomboy · MacroMavens

Hot CPI is backward-looking; rate-hike hysteria will reverse soon as oil falls and growth slows.

She calls the hot CPI print backward-looking. The bond-market decline in long-end yields had been driven by lower inflation expectations tied to falling oil prices, as the Iran situation looked likely to be resolved. Consumers are already stretched, which limits companies' ability to pass on higher prices, and the post-election policy shift is less supportive of growth, so it will not fan inflation in any meaningful way. She expects the current rate-hike alarm to flip the other way once it becomes clear that the data is stale. She also argues that CPI shelter data lags home prices by roughly eighteen months, so the numbers reflect old conditions.

“this hysteria today about the CPI being stronger and the Fed having to tighten will probably flip entirely the other way in reasonably short order”at 6:09

Stephanie Pomboy · MacroMavens

Market reaction to the CPI print is overdone; the inflation outlook is misread for the next few months.

Pomboy says the day's selloff in precious metals came from hysteria over inflation data that is already stale, along with a misreading of the Fed outlook. She sees that as the main driver of the market's reaction. She thinks the market is misreading the inflation outlook for the next few months and the path of Fed tightening, so she views the selloff as unwarranted.

“I think today was the real pain day in terms of hysteria about inflation that's stale.”at 59:53

Stephanie Pomboy · MacroMavens

Consumer spending is strained: nearly all of it is non-discretionary and debt-funded, tightening in 2027.

She rejects the view that the consumer is strong. Headline spending is flattered by prices, since nominal dollars are not deflated for price, so the same basket costs far more than it did years ago. In September, she calculates that about 96% of consumer spending was non-discretionary (energy, transportation, housing and utilities, food, healthcare), and recreation services posted one of the largest percentage declines since 1960. Households are funding this with buy-now-pay-later, credit cards and home equity lines of credit. She expects spending to hold through the holiday season on that borrowing, then for conditions to tighten sharply in 2027 as employment and real wages weaken.

“Long story short, if you add up all the things people have no choice but to spend on, I calculated that 96% of the consumer spending in the month of September was nondiscretionary stuff.”at 14:57

Stephanie Pomboy · MacroMavens

Consumer stress extends above the low end: higher-income households are pulling money from brokerage accounts.

Pomboy cites a JPMorgan study showing customers withdrawing money from brokerage accounts to cover expenses. Low-income households rarely have brokerage accounts, so this points to stress higher up the income ladder, not just paycheck-to-paycheck households. She views it as a warning on how real the affordability problem is. She also argues affordability decided the election: her 'misery index' of mortgage rates plus gasoline prices reached levels above the COVID-inflation peak, and prices have kept rising, just more slowly.

“This is a little higher up the income spectrum and therefore should absolutely be a shot across the bow about, you know, how real that affordability issue is for a lot of people.”at 45:15

Stephanie Pomboy · MacroMavens

Washington gridlock is a misread; state-level anti-business regulation is the real economic policy risk.

The post-election view that gridlock is good because Washington can do no harm misses the point. Governors across the country hold power with anti-business and fossil-fuel-restriction agendas and campaigned on green-new-deal-style programs to be paid for with higher taxes. Regulation can be imposed quickly at the state level, while tax increases and program funding take longer, but the effects on business activity are direct. The power to slow the economy has shifted to the states.

“I think that the conclusion after the election that gridlock is good because, you know, now Washington can do no harm is a gross misapprehension about this situation that we're in now”at 19:13

Stephanie Pomboy · MacroMavens

Underfunded state pensions would force spending cuts and tax hikes in a bear market, as in 2008.

Pomboy says state and local pensions are underfunded by roughly $3–4 trillion. In a bear market, governments would have to cut spending, raise taxes and fund the pensions immediately to keep them solvent. After the 2008 crash it took four years before the state and local sector stopped dragging on GDP. The bubble is much bigger today, with much more leverage. The federal government would then face a double hit: it would have to backstop pensions through the PBGC while losing capital-gains receipts that have been large.

“So you talk about a bear market. All of a sudden, state and local funding, they are immediately forced to cut all their spending, raise taxes, and start funding those pensions.”at 50:40

Stephanie Pomboy · MacroMavens

Anti-business state governors could slow the data center buildout, a clear example of state-level policy risk.

Federal deregulation has been offset by state governors elected on anti-business and fossil-fuel-restriction platforms. Regulation is easy to impose at the state level and can slow activity without federal approval, and she points to the AI data center buildout as a clear example. Any slowdown would show up in growth, in the federal deficit and in credit markets.

“Regulation is something that you can do very easily... I think the A. I. data center thing is sort of a very clear example of that.”at 24:16

Stephanie Pomboy · MacroMavens

AI buildout has moved from debt and free cash flow to equity issuance, leaving the economy reliant on stock gains.

Pomboy describes AI capex funding as moving through stages: first borrowing, then free cash flow, and now equity issuance. She links this to circular financing, such as the Anthropic deal, and argues AI companies need rising stock prices to keep funding the spending, keep earnings up and keep shareholders happy. From this she concludes the entire economy is resting on the stock market, so a sell-off would hit the real economy directly.

“The entire economy is resting on the stock market. When you think about AI, at first they were borrowing, then they were running through... free cash flow. Now they're issuing equity.”at 49:44

Stephanie Pomboy · MacroMavens

High-yield borrowing costs have roughly doubled for refinancers, a strain that earnings growth must offset.

Junk yields are above 8%, and companies refinancing debt that carried about a 4% coupon face a sharply higher debt-service bill. Credit spreads looked calm when they were narrowing, but nominal borrowing costs were rising. Companies have been covered by strong profit growth. If earnings growth slows while interest rates stay high, she expects the strain to show up in credit markets.

“But these yields are crazy. You know, I'm looking at a junk yield here over 8% where those companies are refinancing paper that was carrying a 4% coupon before.”at 31:19

Stephanie Pomboy · MacroMavens

Investment-grade credit quality has deteriorated; 56% of IG is triple-B, versus one-third before 2007.

Pomboy compares credit quality before the 2007 crisis with today. A third of investment-grade companies were triple-B back then, versus 56% now. Levered loans and private credit, which is unrated and whose quality is hard to judge, have also grown. She argues the debt is not only bigger but of much lower quality than in 2007, which makes the economy more fragile in a bear market.

“A third of the investment grade companies were triple b rated. And today, 56% of the investment grade is triple b rated.”at 52:48

Stephanie Pomboy · MacroMavens

Long-term yields are heading higher; the recent rally is not the peak in rates.

She sees the drop in long yields as mostly a move in oil and inflation expectations, with about a third reflecting real yields, which were pushed down by hopes that the deficit would not grow. That rally does not mean rates have peaked. She expects the ten-year could rally toward the 4.5% area for a time, but over the long run long rates are higher. In a full equity bear market, speculative short positions covered in Treasuries could push yields down, but the trend is still higher.

“But I think the path going forward long term for long rates is higher.”at 34:43

Stephanie Pomboy · MacroMavens

Bonds are in a secular bear market; avoid long duration and hold hard assets instead.

Pomboy expects bond yields to keep rising over time as policymakers repeatedly intervene. Those interventions will produce sharp cyclical rallies in bonds, which she says are driven either by risk-off moves or by policy meddling. Because the rally-and-selloff pattern plays out in nominal dollars, and because she expects the dollar's purchasing power to be 'eviscerated' by the coming QE, she advises against buying the ten-year. Her preferred positioning is short-duration credit or the front end of the curve, plus precious metals and other hard assets.

“I think that we're in a secular bear market for bonds that will have within it some vicious cyclical rallies as you have in all secular bull and bond, you know, bear markets.”at 41:28

Stephanie Pomboy · MacroMavens

Oil should fall back to pre-election levels or lower as the Iran situation is expected to wrap up.

Oil prices fell sharply after the election on the expectation that the Iran situation would be resolved. Prices should therefore return to roughly their pre-conflict levels or lower. That decline has lowered inflation expectations and pulled down long-term bond yields.

“we've seen a sharp decline in oil prices post election on the idea that this Iran situation is gonna get wrapped up, and therefore, oil prices are gonna come back to pretty much where they were before, if not lower.”at 3:08

Stephanie Pomboy · MacroMavens

Producer inflation outrunning consumer prices signals hidden margin squeeze, masked by AI-driven headline earnings.

PPI inflation is now outpacing CPI by the largest margin since COVID. Companies are paying more for inputs than they can pass on, which implies margin pressure that is not yet visible in reported results. Headline earnings are being inflated by AI-related paper gains. Consumer-facing companies are in a weaker position than the headline numbers suggest, and their share of bankruptcy filings is rising. Pricing power is already challenged and will become more so as consumer stress grows.

“So that implies some real pricing... Margin pressure for companies that right now, of course, no one sees”at 5:27

Stephanie Pomboy · MacroMavens

Circular AI financing and paper gains are inflating headline earnings, masking weakness underneath.

She argues that the AI boom, with its circular financing arrangements, creates paper earnings that inflate the headline earnings numbers. Those inflated figures hide the strain in the consumer-facing economy and in companies that are exposed to price pressure. This points to a fragile base under reported profit growth.

“the AI boom and all this circular financing and paper earnings associated there with are inflating these headline earnings numbers.”at 5:37

Stephanie Pomboy · MacroMavens

Buy-now-pay-later works like a Ponzi scheme that will end in mass defaults and provider failures.

Buy-now-pay-later is already turning into buy-now-default-later for many borrowers. It works like a Ponzi scheme, since providers can cover missed installments only by signing up enough new customers each month. Once that flow of new customers slows, widespread defaults would ripple through the providers, and at that point she expects reckoning.

“it feels to me like it's the classic Ponzi scheme where if you can get enough new customers every month to sign up, you can make up for the fact that all these other people aren't paying their monthly installments.”at 18:42

Stephanie Pomboy · MacroMavens

State policies that slow the economy would widen the federal deficit through welfare costs and lost tax revenue.

Any slowdown from state and local policy hits federal finances directly. Slower activity means lower federal tax revenue and higher social welfare spending. The market's hope that the deficit will not grow because of gridlock is therefore underestimated, and the optimistic reading of gridlock was too glib and likely wrong.

“that immediately blows back to the federal deficit in the form of increased social welfare supports and lower tax revenue as the economy slows.”at 27:22

Stephanie Pomboy · MacroMavens

Lending bounces between banks and private markets; she would avoid this debt entirely before it blows up.

Lending has been passed back and forth between banks and private credit. Banks originated leveraged loans until those became too expensive, then private lenders stepped in with cheaper money, and the cycle is now swinging back to the banks. Because this lending is being used to refinance borrowers who are already under pressure, she says she would avoid it and that the only open question is when it breaks.

“Long story short, I wouldn't touch any of this stuff with a 10 foot pole... it's just a question of when it blows up”at 32:24

Stephanie Pomboy · MacroMavens

Speculators have not capitulated on Treasury shorts; the yield drop is retail money leaving equities.

Each Friday she tracks the CFTC speculative positions. Even as the ten-year yield fell from 5.3% to under 5%, speculators remained as short as before. They have not been persuaded that bonds are a place to be. This means there has been no capitulation, and the decline in yields is driven by retail money leaving equities for Treasuries, possibly with some foreign buying, rather than by bond vigilantes.

“They basically are just as short as they were before... There's been no capitulation by speculators. The entire decline in the ten year is being driven by this exodus of retail money from equities into treasuries”at 33:23

Stephanie Pomboy · MacroMavens

Gold's selloff is overdone; macro case strengthened by China buying, so prices should recover from here.

Gold was hit on the hot CPI print and the market's rising odds of Fed rate hikes. Pomboy sees that selloff as driven by hysteria over stale inflation data and a misreading of the Fed outlook, not by any change in gold's fundamentals. She argues the macro case for gold has only strengthened, since the major global 'dedollarizers' keep buying (China is buying 'hand over fist') and their strategy is unchanged. She expects today to be the worst of the drop and prices to pick back up, though she does not expect a return to the prior high near $3,800.

“I think today is probably the worst of it, and then we should really start to pick back up. I think the macro case for gold just got so much stronger, and you continue to see China buying handover fist.”at 59:53